Pershing's Ackman Attacks Herbalife's Marketing Model

Activist hedge fund manager Bill Ackman put on an extraordinary show in Manhattan yesterday, making his case in a lengthy, 343-slide presentation that Herbalife, a 32-year-old network marketing supplement company that earlier this week
announced plans to open a new $100-million distribution center in North Carolina, is “the
best-managed pyramid scheme in the history of the world.”

Herbalife responded in statement: "Today's presentation was a malicious attack on our business model based largely on
outdated, distorted and inaccurate information,” report the Los Angeles Times’ Stuart
Pfeifer and Walter Hamilton. “We are not an illegal pyramid scheme.”

Ackman’s Pershing Square Capital Management has put its money where its founder and
CEO’s mouth is by shorting about a billion dollars worth of Herbalife stock. Any profit made, Ackman says,
will be given to charities including the Sohn Conference Foundation, which raises money for pediatric cancer research, and which provided the podium for
Ackman’s accusations.

"I've never seen anything quite like it," D.A. Davidson & Co. analyst Timothy Ramey tells Pfeifer and Hamilton. "I've never seen an investor spend 3
and 1/2 hours of time at a major venue being webcast and then make TV appearances to make his point. It's the largest orchestrated bull or bear case that I've ever seen."

In a later
interview on Bloomberg Television, Ackman said, “This is the highest conviction I have ever had about any investment I have ever made, full stop,” Bloomberg’s Duane D. Stanford and
Kelly Bit report. “This is all-hands-on, and I have everyone in the entire
organization working on this project, including two of the top law firms in the country.”

As the story was breaking Wednesday, HerbaLife CEO Michael Johnson told two CNBC reporters in a phone interview: “This isn’t about Herbalife’s business model. This is about Bill
Ackman’s business model. This is wrong. This is totally wrong what’s taking place. Where is the SEC protecting the individual shareholder right now? This is blatant market
manipulation.”

A release Herbalife issued was along the same lines, pointing out that “an
extraordinary number of puts on our stock are due to expire this Friday. We previously learned this activity was pegged to some kind of ‘significant event.’”

That event, it had since determined, was the presentation Ackman made in New York yesterday, and Herbalife said its request to participate had been denied. HerbaLife describes itself as “a global network marketing company” in its investor FAQ.

“The fuel that keeps Herbalife’s
engine running is fresh recruits, Ackman says, and when the company runs out of new candidates in one country, it simply shifts to another or delves deeper into a different segment of the population
-- like the Latino community,” reportsForbes’ Steve Schaefer. But CEO Johnson also claimed during the CNBC phone interview that, contrary to charges, 90% of its sales are to consumers other than its
“distributors.”

Herbalife sells a line of diet powders, bars, drinks and vitamins through distributors in more than 80 countries worldwide, including Ghana, as Ackman notably mentioned. It reported sales of $3.5 billion in 2011. CEO Johnson was the highest-paid executive in the U.S. last year, the
Los Angeles Times tells us, “hauling in more than $89 million in salary, exercised stock options and other compensation, according to GMI Ratings, a corporate governance
firm.”

CNBC columnist John Carney points out that what Ackman is doing is “just about the opposite of market
manipulation” in that the SEC’s Rule 10b-5 prohibits deceptive stock manipulation. But Ackman “is not secretly buying or selling shares. He has declared his position outright. He is
making his case in public. His hope that this will influence the price of shares in Herbalife doesn't make anything he's done illegal because he isn't practicing deception.”

But as Tom Gara points out in the Wall
Street Journal’s “Corporate Intelligence” blog, “Bill Ackman Isn’t Leading The Herbalife Shorters: He *IS* The Herbalife Shorters.” In other words, his fund
owns about 20 million of the 20.7 million shares of the company currently out on loan for short trades and it will be “increasingly difficult, and expensive” for others to “get in on
the Herbalife shorting action.”

The New York Post’s Michelle Celarier writes that “the twitterati quickly assessed the move as brilliant marketing,”
citing this observation from “Downtown” Josh Brown, who uses the Twitter handle “@reformed broker”:

“Ackman is essentially shorting $HLF just to get a
reputation. And for charity. Beyond gangsta.”

The “dust-up comes ahead of a move to take … Pershing Square Holdings public next year in London,”
Celarier points out.

Thom Forbes has written about marketing and media for more than 25 years. He was editorial director of Adweek and its sister publications in the 1980s and has covered the beat as a freelancer since 1990. For more than three years, he wrote Around the Net in Brand Marketing for MediaPost.